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“In a chronically leaking boat, energy devoted to changing vessels is more productive than energy devoted to patching leaks.” -Warren Buffett
The Evolution of Labor and Society
Human labor is the effort that a person puts into some process or product that enhances value. The employment of human labor is a principle contributor to the very fabric of human culture and society for as long as known human history. For much of our history labor was not much more than walking around and picking up food off the ground, or hunting animals for meat. Life was simple, and so too, were our social structures and culture. People were nomadic, meaning they did not maintain permanent homes. They were always on the move, and their culture reflected values that enhanced their survival in that environment. Little value was placed on material possessions that could not be carried for extended distances. The concept of ownership, especially of the land, was as foreign to them as being able to fly.
A technological innovation known as agriculture came along about 10,000 years ago, and changed all of that. The nature of labor shifted from walking around picking things up off the ground, to actually having to work the soil to get editable plants to grow. For the first time, we see the modern concept of labor applied. After all, while agriculture had its benefits, it was a lot more hard work than just walking around. People developed the notion that if they put in the effort to get plants to grow then they should reap the benefits of that work. The concept of ‘my work, therefore my reward’, was introduced to the culture. In addition, agriculture permitted people to establish permanence by staying in one place. For the first time in history, they could accumulate stuff. With the accumulation of stuff, people began developing the notion of mine vs. yours, of ownership instead of community property.
Later, the invention of money brought change that permitted people to convert their effort into a transferable medium to facilitated the exchange of goods. With trade made easier, people could specialize in certain types of labor in exchange for money. They no longer had to be a jack-of-all-trades and produce everything they needed. They were able to master a specific skill, convert that skill into money that they then used to obtain the things they needed.
For almost 1,000 years until the 18th century, a socio-economic structure called Feudalism dominated Europe. This system consisted of legal and military obligations between nobility; the kings, lords and vassals. This was a hierarchical system with a King at the head, Dukes, Barons and Knights as vassals; each of them were considered the lord over their own fiefdom (lands). At the very bottom of the social structure were the peasants, and just barely below them were the slaves. A peasant was an indentured servant who worked a lord’s lands in return for just enough food (hopefully) to avoid starvation. Peasants were not the lord’s personal property, as a slave was. Their indentured service tied them to the land. A Lord could grant the land to a new vassal, and the peasants on that land went with it. Once a family indentured themselves to a lord, their indentured service passed from generation to generation; so that it became a multi-generational form of quasi-slavery.
The rise of international trade fueled by an increasing desire for exotic goods, and enabled by a new class of merchants that traveled the world, evolved into what we now call Mercantilism. The theory of Mercantilism was one of protected trade through high tariffs and laws that restricted trade to protect local production. This practice was the source of many conflicts across Europe. With the onset of industrialism, and the ability for a factory to produce large quantities of goods, Mercantilism started to fall apart as a sound economic theory. An alternative was needed that could explain increasingly complex financial interactions.
In the 18th century, David Hume and then later Adam Smith challenged the conventional economic theory of Mercantilism with a radical new idea. Lift trade barriers, and let free trade and competition determine the price of goods. They created the theory of ‘means of production’, profit, wage labor and the accumulation of Capital. Of course, this radical new theory would be called Capitalism. It was all based on the notion of the owner of capital being able to add labor to that capital to convert it into something of higher value. The sale of that capital would take place on an open market, where free competition would create the optimal price for both seller and buyer.
From the perspective of the Capitalist, two factors affect their ability to compete in the market; the cost of capital, and the cost of labor. The cost of capital was considered fixed, since in a free market all competitors could purchase capital at the same price. Therefore, labor was the only factor they had to work with where they could exorcise any control. Coincidently improvements in farming technology meant that fewer farmers were needed to tend the land, creating a huge surplus of ready labor to use in new factories being built. Since most laborers were former peasant farmers (barely better than slaves in social status), they were easily exploited and abused by the first industrialists. In fact, this exploitation and abuse, so reviled a young German philosopher that he took up their cause and attempted to envision a better way to run the world, were workers could not be exploited by the elite class. His solution was drafted in 1848, called The Communist Manifesto. He was Carl Marx.
The Industrial Revolution…is Still Underway
The advent of steam made possible large-scale mining that made iron cheap. Peasant farmers, displaced by improved iron plows found themselves migrating to the city to run the new machines of industry. Thus began the Industrial Revolution. Many will argue that the Industrial Revolution based primarily on steam power, extended mid-way through the 19th century, followed by another Industrial Revolution with the invention of better fuels, and steel. I prefer to think of the Industrial Revolution as one continual period of redefining the meaning of labor that is still taking place today. The Industrial Revolution is about the discovery that machines can be used to harness energy to do work that used to be the sole domain of biologic muscle. Initially these machines needed human operators to run them, and so there was a temporary transition from farmer to machine operator, however it did not take long to discover ways to automate the machines so that less and less work was required from a human operator.
In the early 19th century, many people in England became very successful as highly skilled textile workers, weaving the fabrics that the world needed to make clothing. It was a trade that took a lifetime to master, and could provide a nice lifestyle to those who did. Then along came progress, new technology in the form of a wide frame loom than could be operated by unskilled labor. This was very profitable and a huge boon for the textile mills. As you can probably imagine, those weavers who spent a lifetime learning their trade and who had families to support were suddenly being replaced by technology, were not very happy. They revolted by attacking textile mills and smashing the new looms. They would come to be called the Luddites, after General Ned Ludd. People do not like change, especially when it upsets their established way of life. The term Luddite, or Neo-Luddite is still used today to refer to anyone that objects to the progress of technology.
Since the industrial revolution began several hundred years ago, the transition period where people were required to help run the machines eventually resulted in the workers ability to use that requirement as bargaining leverage to demand that they participate in the profits realized from improving productivity. The owners of capital had no choice, since the machines could not yet run themselves. For the first time in world history, the average citizen was elevated to a lifestyle that would have been the envy of kings in the previous century.
The capitalists were determined though to improve profits any way they could. If they could not control the workers wage, then they would have to discover ways to eliminate the worker, thus reducing the labor component of production. Discovering ways to automate the machine to do work with less input of human labor became a primary goal of the capitalist. Over time, most people came to accept automation as the price of progress. It seemed that every time machine productivity increased, and workers were displaced, that there was enough demand in new markets to employ the displaced workers. At least that is how it seemed while the United States enjoyed being the worlds primary manufacturer of goods after World War II.
Disappearing Labor and the Death of the Middle Class
With the rise of the industrial revolution came the rise of the laborer. The laborer is the person who ran the machines, who through sweat and hard work made things, and greased the wheels of industry. Human labor was indispensable and a valuable commodity. In fact human labor was inextricably linked to production. Every economic theory whether it is classical, neo-classical, Keynesian, or Marxism all rely heavily on linking labor directly to production.
Early in the history of Capitalism, the laborer was little more than an indentured servant. It was never envisioned that they would someday actually be able to buy the goods they produced. Their role was clearly defined as simply a means to an end, a necessary ingredient in the production of goods. Following the Great Depression, an interesting phenomenon was discovered. The average laborer could actually contribute to the economy as a consumer of goods, thereby creating demand for more production. More production required more labor, which became more consumption and a golden age of increasing consumption and growth was born. For most of the mid-section of the 20th century the demand for labor remained high, therefore, the laborer was able to demand that companies share most of the productivity gains realized from automation.
For the past 30 years, the United States has seen a huge shift in the labor market. The manufacturing sector has continued its push to find new ways to automate the machines. This was fine following WWII, as the United States was the words manufacturer, and had enough growth to offset gains in automation. This began to change however as other nations recovered from the war and rebuilt new factories that were capable of competing with the best factories in the United States. In the U.S. this translated into slower growth beginning in the 60’s. However, automation continued to take its toll on the workforce. This effectively meant that there was a growing surplus of labor. As any economics student knows, whenever there is a surplus of something in the market, prices drop. However, many wages could not fluctuate with the real market demand because of Union contracts that were established while the laborer was in high demand. What resulted was a war on labor unions to disband wage contracts. In addition, where possible, companies slowed down wage growth. They continued to innovate and automate, but wages no longer shared in the growing productivity. The capitalists for the most part were not conspiring to destroy the middle-class, those productivity gains were needed to continue competing with foreign producers who often had very low labor cost.
As many laborers found their jobs disappearing, they increasingly had to face the prospect of changing careers and making less money. American families learned to cope with a declining wage. They found extra members of the family able to go to work and add to the family income. The long-term effect of this copping mechanism however did not solve the problem, in fact in many ways the problem started getting worse. There were now more workers in the marketplace, putting further downward pressure on wages. Many families developed a new copping mechanism. If they could not make enough money to live the lifestyle that they had expected to have, they could borrow money to buy that lifestyle. More and more families started to rely on debt as a way to keep up with the Jones.
What became of the laborer? Increasingly the laborer became rare, just as the farmer became rare in the previous century. The transition in labor never came to completion during the first Industrial Revolution that ended around 1850; it never found a state of equilibrium and stabilized. That is why I think we are still in the midst of the revolution.
There is one factor involved with the advancement of technology that goes unseen by most, because we see thing in the present; the here and now. As good as our minds are at analysis, we have a difficult time putting things into the proper context, or seeing anything other than simple trends:
If I am a fisherman, and I catch a fish, I can sell you that fish for a sum of money. Then you have a fish and I have some money. We both still have the same value. I can now go catch another fish and repeat that process. However, technology is not based on labor, as catching a fish is. Technology represents information. If I know something, I can sell you that knowledge for some money. Now you have knowledge, and I have money, but I still have the knowledge also.
While fishing is a zero sum game, technology is a plus sum game. More value exists after every transaction. This results not in the linier growth we would see from an industrious fisherman, but in an exponential growth curve. Previous gains are added back on top of future gains like compound interest. They build on each other. If you look at a small section of an exponential curve it does resemble a linear curve, which is why so many people are caught unaware of the change when that curve starts to accelerate.
One of my favorite stories is the Human Genome project. After the first seven years, they had only completed decoding one percent of the human genome. Many scientists grew frustrated at the prospect and cost of taking another 700 years to complete the project. Ray Kurzweil told them they were on track to complete the project in another seven years. Of course, no one believed him. How could they finish in the next 7 years when the first seven years only saw one percent of the project finished. He explained that the technology was doubling every year. They were only seven doublings away from turning one percent into one hundred percent. As it turned out Ray was not only correct, but the project finished a little ahead of that seven-year prediction. The same kind of exponential growth is behind the computer chip with the now famous Moors’ Law.
Technologic innovation and machine automation is now happening at a pace that is becoming hard to ignore. At first, the job market was able to keep up by creating high tech jobs and expanding the service industry to replace lost manufacturing jobs. Recently, the pace with which jobs are being replaced by machines has accelerated as the pressures of global competition and recession have required improvements in production efficiency to keep cost down. Many companies have a hard time knowingly replacing worker with automation outright, especially smaller companies where the owner may be closer to the workers and actually feel bad about laying people off. However, an economic downturn creates opportunity for those companies. They are relieved from guilt because the blame for layoffs is the fault of the recession. As the economy picks back up, and demand returns, they have a choice; rehire employees, or upgrade their machines and processes to automate the job. At this stage, it is much easier to invest in automation, especially since interest rates are at an all-time low. As far as losing the purchasing power of the American consumer, foreign emerging markets have stepped up to create the demand. The American consumer is not required to provide a demand as they once were; International markets have diversified consumption.
There is a problem though that few people are willing to address. The problem is that many of the dynamics of the American laborer are on the fast track in developing countries. Eventually these countries will start having the same problem the U.S. started experiencing. More developed countries in Europe and Japan already are experiencing problems. The only way to sustain perpetual growth is through increasing debt. The creation of debt however has an end game. There comes a time when the accumulation of debt cannot be sustained, as we saw in 2008 when the debt laden real estate market crashed. America absorbed the bail out of banks by printing more money. However, this was not an option in Europe with everyone tied to the Euro. Each country had to borrow a lot of money to bail out their banks to prevent them from failing. Now, that huge government debt has grown to the point that those countries are struggling with being able to make the payments. The very same banks that the governments bailed out for making bad investments are now refusing to lend those governments more money. This debt trend will spread to developing countries as the global market for labor starts to feel the pinch created by technology.
The Industrial Revolution…where will the wheel stop.
The next several decades should see the Industrial Revolution finally come to an end. In that period we will see the introduction of new technologies that are so revolutionary, that they will alter the very fabric of our society in ways that are hard to grasp. Even if I am off on the periods listed below, these statements will all be true in the very near future. Three technologies will cause the majority of job losses; 3D printers, Robotics and Artificial General Intelligence.
The invention of 3D printers will redefine the manufacturing and Construction industry. Initially we will see resurgence in local manufacturing with small fabrication shops. These will not be traditional manufacturing jobs however. There will be some growth in technology jobs and 3D design jobs, especially artists. We will see the biggest decline in foreign manufacturing markets, and continued local decline in traditional manufacturing jobs. Expect to see almost all remaining manufacturing jobs disappear with 10 to 15 years.
Most 3D printers today work with only one material, plastic, metal, glass or ceramic, even wood. However, that limitation will be overcome in the very near future, as newer printers will be able to incorporate multiple materials into a single product. When that is achieved, we will have the equivalent of the ‘Star Trek’ replicator, able to produce anything on demand. The impact on manufacturing will be huge. With the complete elimination of labor, manufacturing will once again transition to a local possibly even personal endeavor.
We still need people to assemble larger and more complex manufactured items for a short time; such as appliances and aircraft. However, it will not take long with the new robotics systems under development, to replace all manufacturing labor.
OK, we have been bleeding manufacturing jobs for years now, but at least we still have a strong service sector…right? Wrong! The development of more intelligent Interactive Voice Response (IVR), Intelligent Agent systems in the next few years will make a big dent in administrative, secretarial, and customer service jobs. Apples’ Siri is a sign of things to come. Expect a 50% reduction of these jobs the next ten years; by twenty years, we could see almost all service jobs disappear.
Service jobs are being hit just as manufacturing was around 30 to 40 years ago, but they will catch up rapidly. Do you use an ATM, on line banking or a drive-up automated teller instead of a live bank teller? Have you ever been to a grocery store with automated checkout lines instead of a live checkout person? Have ever called a company and had a computer answer the phone. If you answered yes, then you have witnessed the beginning-of-the-end of our service industry.
In the last few years, voice response systems have improved to the point that they can understand anyone’s voice, even with different accents and languages. Instead of the rather dumb list of “Press 1 for…” options, they are starting to ask verbal questions that require answers that are more complex. In just a few more years, these systems will all have what are called intelligent agents. These are not truly smart Artificial Intelligence (AI) yet, but they know how to have a conversation, they will be experts in a specific area and be able ask and answer questions, and even look up information from a database. Instead of giving a menu list of options, the new system will simply say; “Hello, XYZ Company, How may I help you.” I would not count on Customer Service as a long-term profession.
In the near future, when someone calls your office, your phone will answer itself; it will ask who is calling and what the call is regarding. If it is from someone that you have told the phone you want to speak to, it will contact you wherever you happen to be and ask you if you would like to accept the call. When your phone is not busy answering incoming calls, it may be making outgoing sales calls for you, sending email reminders to people about their appointment, ordering flowers for you wife’s birthday, or searching the web for news on a topic of interest to you. If your occupation is a receptionist, call center operator, or administrative office assistant I would be worried.
We talked about the 3D printer being used to manufacture products; however, it is also being developed for construction. That is right. The first commercial unit able to construct an entire small building is expected to be ready by 2013. Taking exponential growth into consideration you can probably expect to see these systems used on large industrial and commercial projects such as skyscrapers by the end of this decade.
Robots built today have the manual dexterity to do general repair work. In fact, there is one called Robonaut, already on the job at the International Space Station. Robonaut can do repairs in the vacuum of space without putting an astronaut at risk. Other robots are performing delicate surgery that is physically impossible for a surgeon alone to do. Of course, a skilled person operates these systems by remote control. The only element keeping these systems from being fully autonomous is a highly skilled brain telling it what to do. Those brains are coming. Before 2020 gets here, a super computer will exist that contains computational power equal to the human brain. Within seven to eight years after that, a typical desktop computer will be just as powerful. The software of Artificial General Intelligence will not be far behind.
These types of devices will come down in cost as there use is accelerated until they are filling every type of repair position; automotive, HVAC, general office and home maintenance, and everything in between.
Surely doctors, lawyers and the computer specialists who will create the robots and artificial Intelligence will be safe…right? For a little while yes, but in the end no, even these jobs are on the block. This will take a little longer because these highly trained professionals rely much more on what we call general intelligence. They quite often have to pull in knowledge and understanding from multiple areas and disciplines that are each very complex. A true Artificial General Intelligence (AGI) that can reason at the level of a person probably will not emerge for another twenty to twenty-five years.
An AI however, does not have to be conscious and intelligent at the human level before it starts making an impact on labor. Semi-intelligent systems are being developed today that will be able to diagnose a patients illness, in many cases more accurately than a human doctor could. Even before reaching full human intelligence, AI systems will be used to make human professionals more productive by taking over some of their workload. That increased productivity equates to a need for fewer professionals.
What is a Person to do?
Wow, so does that mean that we are all out of a job in 30 years? How can that be, there must be work so that we can earn a living, to pay our bills and debts and buy stuff. How will our society function? What good will all that technology be if we are all out of work? We will all be living in the land of plenty, but no one will be able get any of it…or will they?
Current Capitalist economic theory accounts for a balance being achieved between supply and demand. It would appear that with all this technology we might have an abundance of supply. In fact a number of well know scientists and experts are calling for just that. In Feruary of 2012 Peter Diamandis and Steven Kotler published ‘Abundance: The future is better than you think’. Another book by famed scientist and professor at the Oxford Martin School, Eric Drexler has announced a book due out later in 2012 which will be called ‘Radical Abundance’. Both books speak about the ability for technology in the very near future, being able to increase productivity so much that we will be able to create an abundance of anything we could ever want; the age of scarcity is almost over they claim.
I cannot speak about Dr. Drexler book yet because it has not been published. The first book though, by Diamandis and Kotler, expects new technology to usher in a golden age of innovation and economic growth. Unfortunately, they are not schooled in historical socio-economics and have a naïve attitude about how all this will play out. The potential for abundance of resources will be there, of that I am certain. What I do not have faith in, is our current socio-economic institutions; banks, corporations, the Federal Reserve and the government to enable that abundance to be shared with all of humanity. If current trends are any indication, wealth will continue to pool at the top crating new age of Feudalism. The bulk of humanity indentured to a few elite families.
Dropping employment will lead to declining demand. Declining demand can be made up in developing countries for a little while, but they too will go bust eventually, especially after they start to loose manufacturing to 3D printer technology. Expect increased civil unrest around the world as unemployment continues to climb, even in the U.S. At some time, we will reach a tipping point. I cannot say when that will happen, but the population after tasting freedom is not going to go easily back in the cage. Either the government will have to get extremely repressive and brutal (most likely scenario), or they will have to concede that the system is failing and be open to change (do not hold your breath). Either way, it will probably end up in a violent transformation. But what should we do then on the other side of that transformation. If we must endure a lot of pain to gain something, we want to make sure that it is worth it.
The Great Reformation
When society no longer has any money, just create a new society that does not need any. – Me
When whole institutions go through radical change we refer to that change as a reformation; meaning the old institution is reformed into something new. Reformations can be bloody or peaceful; they can occur because of a revolution, or out of a gradually changing culture and needs of a society. A famous reformation occurred when a group of people broke from the Catholic Church and formed their own religion. It became known as the Protestant Reformation.
As you read above, it is obvious that our capitalist society depends on laborers to supply a middle class of consumers and money to buy the goods being produced. It has lead Capitalism to be a great success in the last few hundred years. However, if you remove the middle class as a consumer, then there will be no support for production; there will be no one to buy the goods being produced. We have all watched the news in awe, as the reports about unemployment are bleak, while at the same time companies are reporting record profits. This is because they have improved productivity with automation. They do not need as many workers to make the same amount of goods or provide the same services. The catch phrase of this recession has been, “learning to do more with less.”
Declining wages though, means decreasing revenue from taxes and more dependence on public assistance. Public debt will then keep growing out of control, quickly becoming unsustainable. As witnessed in Europe, austerity (cutting back on government spending for social programs) has a disastrous negative effect. Nevertheless, people get desperate at times like these, and cling to their old institutions out of fear. At that point, nothing short of a very large reset button can correct the course. It is as if we are all ridding on the Titanic. There is a very large ice burg dead ahead, and there is no time to change course. It is going to crash. We have a choice: we can grit our teeth, hold on and pray for salvation, or we get out the lifeboats and abandon this sinking ship of Capitalism. However, where would we go? What could possibly work better than Capitalism, especially since we will all be out of work and have no money or power? Certainly, not Soviet Communism or Fascism; they both have serious flaws and would be problematic.
The sixty four million dollar question then is ‘If not Capitalism, what?’ I have pondered that question for years. In previous articles, I have proposed changes such as reforming the banks and health care institutions into non-profit or state run businesses, and a new democratized global government. However, those solutions are simply Band-Aids covering deep lacerations in a very sick patient. The problem is that even with those changes we will be unable to account for the mass and rapid transition to an economy that requires no input of labor, no wages, and no taxes. Something more must be done.
What a conundrum we find ourselves in; the ability for society to produce unlimited goods with no input of labor results in the mass starvation of most of the world’s population, when the opposite should have been true. We should be reaping the rewards of increased productivity and an overabundance of the material goods that we equate with a high quality of life.
Recently I watched a video produced by a 95-year-old inventor/futurist/social engineer by the name of Jacque Fresco. Jacque has been thinking about this problem far longer than I have; long before anyone else even saw the problem on the horizon. He has come up with a solution that is very elegant, though radical.
Jacque Fresco and the Venus Project
Build it and they will come.
As part inventor, designer, architect and futurist Jacque Fresco has spent his life solving difficult problems by thinking outside the box. Most notably, he has been able to transcend culture and existing dogma to offer novel and often revolutionary ways to solve some very old problems. In 1975 he created the Venus Project with the lofty goal of completely redesigning our society in such a way as to maximize the use of technology to eliminate hunger, poverty, corruption, abuse of power, and war.
Jacque’s vision is to create a classless society where technology serves all humankind. The plan would be to eliminate money, and replace it instead with an economy based on resources. All resources would be the shared property of every person on Earth. Computers and automation that have no desire for profit or power would replace our market economy and provide for a new abundance to everyone. Since there is no money, people do not get paid for any work they do, nor do they need to pay for the things they use or do. Everything is free. People will not be wage slaves to an economy that chews them up and spits them out. People will be free from drudgery, and able to pursue whatever they find rewarding. You might decide to become a scientist and do research, or express yourself with art, or music, or simply travel the world and learn about its wonderful people. Alternatively, you could spend your years in school satisfying your thirst for knowledge, or perhaps you enjoy spending your time in spiritual meditation, convening with God. It is your life, you choose; anything you want to do.
Wait just a minute; I have heard this before; they try to do that with Communism. No, it is not even similar. Communism was a currency-based economy where people were exploited for their labor. Power was concentrated in the hands of a few elite, and therefore it maintained the class divisions that Marx sought to eradicate, and was custom built for the worst kind of totalitarian corruption. Marx would have turned over in his grave if he had witnessed how is ideas were perverted. If you remove money from the equation, and place no people in a position of power where they might be tempted to become corrupt, then no person can amass enough power to exert their will over the population. This new world will be free of money that corrupts, free of people who would enslave you, and perhaps best of all, free of Politian’s who would tell you how to live.
Most crime will disappear; why would anyone steal, when they can obtain anything they want at no cost. If we further decriminalize those crimes that do not cause harm, that exist only as a means of forcing people to conform to a social norm, then there would be very few criminals, and no prisons. We will probably also find that when people are raised in an environment free from stress and all the factors that have created dysfunctional families, that children will grow up with fewer psychological disorders that may lead to unacceptable, antisocial behavior as an adult. After all, we are all products of our environment.
There will be no need for war when everyone has what they need. No need for police when there is no crime, or prisons when there are no criminals. Instead of laws that try to enforce a certain behavior, the structure of society will bring that behavior out in a natural way. No one is born evil; for someone to become evil, they first have to live in a dysfunctional society.
I do a disservice the Jacque’s vision by trying to describe every aspect in this short article. Much more information is available on The Venus Project web site located here: http://www.thevenusproject.com/
I’m not the only person that sees this comming; other highly respected people are starting to join the fray; like Thomas Frey:
2 Billion Jobs to Disappear by 2030
In the next article, I will go into much more detail about how a Resource Based Economy would actually function.
Keep reading: Change is the Future – Part II
It’s Not Your Money
An argument that we hear repeatedly against taxes is that what we pay in taxes is our money and we should be able to keep it. Some even go so far as to say that the government is stealing that money from us. In this blog post, you will hear an argument for why that way of thinking is wrong from the perspective of a wage earner, someone in the bottom 99% of income earners.
It is fair to say that the job market in America is a competitive one. Actual wages are an agreement between the employer and employee about what a job is worth. Even with the economic downturn, companies will pay whatever it takes in wages and benefits to hire and retain their workers, no more. Low skilled jobs where there are plenty of workers will pay much less than a job that requires an advanced degree and years of skilled experience in which there are a limited number of people who are qualified.
If qualified workers are in short supply as we saw in Silicon Valley in the 90’s, then wages will go up as competition for the most skilled people heats up. By the late 90’s most companies were paying large signing bonuses to anybody who joined, and even paid bonuses to existing employees who suggested someone that got hired. The other side of that is that a few years later the dot com bubble burst. Companies reduced their labor cost any way they could, often through layoffs. However, some companies would lay off their higher paid employees, just to turn around and rehire that position for a much smaller wage. Anyway, that is what happened to my job in 2001.
If you were lucky enough to have multiple job offers at the same time, you would likely evaluate a number of factors before deciding which one to accept; quality of schools, crime rates, and the areas cost of living. When evaluating the cost of living you will consider the cost of housing, food and other consumables. However, you may also look at the areas tax structure; in other words, how much each areas tax burden is; sales and state taxes. All other factors being equal, the company with a higher cost of living will have to pay a higher salary to attract people to the area. The employee does not care so much about how much they make (gross wages), so long as they have the best lifestyle they can afford, and that means how much money they bring home.
The reality is that if taxes are reduced to the average wage earner, you may get an initial boost from the extra monthly disposable income. However, eventually the employer will offset the tax savings with slower wage growth each year or possibly even a wage reduction to bring your take home pay back into balance with what you job is worth in your area; the minimum they can pay you and have you want to stick around. Therefore, changes in taxation will have an impact in the short term only. In the long run your take home pay will be the same, with or without taxes.
Therefore, that money being paid in taxes, is not yours, it never was. It is just a number. If your gross wage says you make $20 an hour, and you pay 20% of that in taxes, then your real wage is $16 an hour. $16 an hour is what your job in your area is worth, not $20. If the law changed and somehow all taxes were abolished, you would get to enjoy that extra $4 and hour for a while. However, your employer would likely reduce future raises and offer lower wages to new hires, until he was again paying what the job was really worth. You cannot beat a system when you are not making the rules.
The Benefits of Taxation
Some might ask after reading the last section, if it does not matter what we pay in taxes, then why pay taxes, what is in it for me? How does paying taxes benefit me?
The answer is all around us. Almost everything substantial in society we owe to taxes; the roads we drive on, the sidewalks we walk on, the street lights that illuminate those roads and sidewalks, and the safety standards that make our vehicles safe to drive just for starters. Most of us have had the trappings of a modern society for so long that we have started taking it for granted. Many people fail to realize that what is paid in taxes is the cost to maintain our society, America. Without taxes, we would have the same living standard as some African countries that do not have the benefit of a functional government, such as Somalia.
Most medical and pharmaceutical advances would not have happened if not for tax money that paid for research programs.
Most technology would not exist today if not for research dollars paid for with tax money.
While I’m a pacifist at heart, the truth is, I would not have the freedom to write this blog, nor would you be able to disagree with me if not for the tax money and American blood that paid dearly for that right.
The next time you walk down the street and are not murdered, thank the tax dollars that pay for law enforcement to protect you.
Unless your parents were wealthy, you probably benefited from a public education paid for with tax dollars. Without which you could not afford to own the computer you are reading this on.
If you or anyone you know has ever been the victim of a fire, had a medical emergency, or even a cat stuck in a tree, you can thank your tax dollars for the firefighters, and paramedics that come to your rescue.
One thing that you will hear people say, even after they understand all that has been said above, is that it not fair. They may not have school age children, yet they still have to pay for schools. They do not drive, but they have to pay for roads and highways. People will accept that they have to pay for the things they need, but are reluctant if they have to pay for things they perceive has having no value to them. The answer to that argument is this: Most of those things you may not think you need, you still depend on in one way or another. You may not have school age children, but you benefit every day from having an educated workforce in this country that can provide the products and services you consume. You may not drive on the roads and highways, but the goods and services you use depend on them. In fact, you may be alive today simply because tax dollars paid for a police officer or a soldier somewhere that ensured that you have a safe place to live and work.
Some things our tax dollars pay for are simply humanitarian. Most of us have evolved to the point that we are able to think beyond just our own selfish needs. If we see a hungry child covered in grime, our heart goes out to them, and we feel compelled to help. If we see someone who has a disadvantage that others are taking advantage of, we want to step in and help that person. Most of us grew up thinking that this was a core American quality. A quality, that set us apart. It is what put us on the good-guys side in every battle. Taxes are a way of realizing that need to help.
Our economic system is very complex, so I will not go into great depth in this article as I have written extensively about it in other posts. Money (capital or wealth, whatever you want to call it) is in a constant state of flow from one person or company to the next. It never stays put for very long. When free from restrictions, money has a propensity to pool in the upper layers of society where they write the rules.
Take for example our earlier discussion about taxes and wages. If taxes are reduced, the employee may see a short term benefit, but the employer who makes the rules can reduce your wages, or reduce future raises so that eventually you no longer get that benefit, they do. At the end of the day the person who writes the rules takes home all the chips.
A progressive tax system is one that is funded more from high-income earners than from low-income earners. When taxes are in balance with the normal propensity for money to pool at the top, they act as a stabilizer shifting just enough back to the lower levels so that one group does not grow more than the others do. Some people call this wealth redistribution, but wealth is being redistributed every day without taxes. When done properly, taxes are wealth balancing. They help prevent an unfair flow of wealth to those who make the rules which leads to a system out of balance and greater wealth disparity between the haves and have not’s.
Recently, in the United States, taxes on the wealthy have been reduced to the point that enormous wealth has been redistributed to the wealthiest people, leaving much of the rest of the country impoverished. Higher taxes on the upper income layers of society are needed to be put the system back in balance. We are not playing a game of Monopoly here folks. It is not OK for only one person to win the game. We are all in this together, and either we all make it, or sink.
We have seen that the income tax is not taking away something that is otherwise ours. That money was never ours to begin with. We take home what our employers and we deem our job is worth, no more; taxes or no taxes. That portion of our gross wages that go to taxes benefit us in numerous ways, some not so obvious. Taxes are responsible for the very fabric of our society. They bring balance to a society that would otherwise spin out of control. They benefit all of us, and it costs us nothing.
If you have read my other posts, you will know that I am not a socialist, or a communist. I believe that Capitalism is the best form of economy. However, those that write the rules at the very top of the food chain see the world through very different glasses. They envision themselves as gods, and the rest of the masses simply here to worship them and serve. Such a world view does not support Capitalism, it is in fact it’s dreaded enemy. It will cause the Capitalist system to flail out of control, growing in fits and spurts, feeding the greed until they consume themselves. If we want to save Capitalism, save our way of life, or at least salvage as much of it as we can, we must wake up and stop trying to see the world through glasses crafted by the wealthiest few. We need to see for ourselves what makes the world tick. If we fail to learn and then act, we will all be doomed as this system destroys itself from the inside.
There have actually been a several reformations throughout history. The term reformation means to reform or remake. When institutions that form the core of a society fail, or are torn down, new institutions rise up and replace them. The old institutions are reformed into new institutions. This is radically different from what we see on a daily basis as things change slowly over a longer period. Reformations are usually abrupt and significant. The Protestant Reformation saw a large number of people break from the Roman Catholic Church and is usually the first thing that comes to mind when discussing the Reformation. That Reformation resulted in the first protestant church following Martin Luther; we know them today as the Lutherans.
It is fitting that the final part in this series is written on the eve of the financial collapse that I have been predicting and which may lead to the next Reformation. So, fasten your seat belt, open your mind to new possibilities and prepare to step outside your comfort zone.
The Federal Reserve is currently using monetarist thinking by investing in long-term bonds to bring down interest rates hoping to increase borrowing and spending, and thus save the economy from a double dip recession. The problem however is not liquidity of funds for borrowing. The problem is that the people who would be consumers of goods are not buying because they still have too much debt. They have no equity in their homes and cannot take on any more debt. In fact, this move by the Fed will have the negative effect of reducing many people’s investment income from bonds, and therefore have a negative impact on goods consumption, especially from our seniors.
The storm causing this second tsunami in the economy is focused in the European continent, with their banks nearing collapse. The world has not yet recovered from the last storm. Therefore, it is less prepared to weather this one. The world’s banks might topple like a row of dominoes. If all the world’s banks fail, were talking total economic collapse. No one will be safe. We may be in for some very tough times for a while until the world can heal its wounds. What comes of that healing process may take many forms, and only one thing is a sure bet…it will be different, it will be reformed. If the world must go through a reformation, then we should want the new institutions that rise from the ashes to correct the flaws that led to this failure. We should learn from our mistakes when planning a new future. However, that is often easier to say than do.
The Dreaded Finger
Americans love to play the blame game. After the collapse, there will be no shortage of finger-pointing at the cause of the failure. All too often, this will result in simply pointing at the obvious, and failing to uncover the root cause. Fingers will be pointed at the liberals saying excessive regulation led to the failure, if only we had let them run free and get government out-of-the-way. Fingers will also be pointed at the conservatives saying there was too little government regulation, and that what we need is more rules, more government. Both sides of that argument will be wrong.
Banks will not fail because there was too much or too little government regulation. The banks will fail because human nature took over. A flaw in the design permitted human greed to rule over logic and drive the industry to poison the very water from which it drinks. Banks are corporations and therefore must ultimately answer to its shareholders. However, banks serve a vital role in a capitalist system as the controller of all capital that flows through the system. This gives the banks an enormous amount of power. So much power in fact, that they have been calling most of the shots on all sides of the political spectrum. We live in an illusion of Democracy. In fact, in America, what has evolved over the years is a Neo-Fascist Plutocracy run by the banks and a few very large corporations. Elections and politicians are permitted to exist simply to appease the populace by thinking they still have some modicum of control over their life.
The banks are not in this alone. The health care industry has been on a runaway spending spree for half a century and will crumble shortly after the banks go down. Famine, strife and anarchy will put a huge demand on health care, and there will be no way to pay for it. In 1960, the government spent about 1% of GDP on health care. By 2011 that had risen to 7%, a 700% increase in cost relative to the growth of the economy. Almost all health care providers are now corporations, which means they ultimately have to answer to their shareholders and provide a profit. The drive to be profitable is wrought with conflicts of interest with the people who go to them for medical help. They are motivated to turn a profit all costs. Their concern for a patients wellbeing culminates in a desire to avoid lawsuits, and stops there.
This is exacerbated by the fact there is also a health insurance industry, born ironically because of the high cost of health care. The health insurance industry is the primary payer of provider services, giving them a lot of leverage. Health insurers answer to shareholders also, giving them an obvious conflicting interest with the people who buy insurance. They are motivated to turn a profit by minimizing the cost of delivering health care. On the surface this sounds like a good thing, however the dynamic of the two industries trying to outdo each other and jockey for more profit has resulted in gross waste and inefficiencies. If the banking industry remained as healthy as a horse, the healthcare industry would still implode eventually because its design is flawed resulting in an out of control cost system. However, these two industries are now large enough and powerful enough that true reform cannot take place. It is going to take something on the scale of a reformation to reshape these industries and design out these flaws.
There is yet a third leg in our system that is fundamentally flawed. That third leg, not surprisingly is our form of government. The current form our democratic republic has taken in no way resembles what the original architects of our nation had in mind. Have you ever wondered in amazement that Politian’s rarely do what the public wants? The only way a politician can be elected is by out spending the competition. It has become a media circus where the best fundraiser wins the race. Raising funds however means making promises to those giving the money. Therefore, every politician ultimately answers to his or her contributors, not the American public. If that is not a dictionary definition for a conflict of interest, I do not know what is.
After the collapse, we will survive to rise from the ashes and begin the reformation. There will be numerous recommendations for change in how we govern ourselves. Some may call for a return to Socialism or Communism, while others may call for an extreme form of Fascism, perhaps even Anarchy. We need not adopt any of those extremes. I will explain in a moment, how I think we simply need to make a few changes to our Capitalist institutions to save Capitalism, and then reform our corrupted neo-fascist republic into a truer more equitable global democracy.
Defense spending alone will be just shy of a trillion dollars in 2011. Imagine what we could do if we did not need to spend that money. But, but, you say: we have to defend ourselves from those who want to do us harm. Most, if not all of those people hate Americans because of our imperialist expansion and corporate protectionism imposed on foreign countries. Repressive dictators that the U.S. propped up in order to secure access to Middle Eastern oil has resulted in a deep hatred for America. When ever you hear them say protecting U.S. interests, they really mean that our government and your tax dollars are going to war for a Corporation. Our enemies then use religion as a recruiting tool, but it was our Neo-Fascist/Corporatist intervention in so many countries that created the conditions permitting the rise of Islamic extremists in the first place. The solution is radical, yet simple. It could only come about as a recovery from a global melt down followed by Reformation. Without a global Reformation, the power elite would never permit all the changes I am recommending.
People around the world are becoming tierd of a corupt capitalist system which is robbing them of democracy:MADRID — Hundreds of thousands of disillusioned Indians cheer a rural activist on a hunger strike. Israel reels before the largest street demonstrations in its history. Enraged young people in Spain and Greece take over public squares across their countries. Their complaints range from corruption to lack of affordable housing and joblessness, common grievances the world over. But from South Asia to the heartland of Europe and now even to Wall Street, these protesters share something else: wariness, even contempt, toward traditional politicians and the democratic political process they preside over.
We must form a global constitution, guaranteeing every person on Earth protection and equal rights under a common constitution, as well as access to a fair judicial system, and equal representation in a democratic government. Representation should be at the local, regional and global level. Most laws that affect our daily lives should be maintained at the local and then the regional level, with only a minimum of laws enforcing the constitution at the global level. The closer a law is to the person who it has jurisdiction over, the more the people will feel in control of their destiny. People should be able to maintain most of their local culture that brings so much diversity and beauty to the world. With the world united under a common constitution, there will be no need for large army’s to fight one another. No nations to wage war.
All that energy could be instead used to build up the under developed parts of the world and repair the infrastructure in the developed world which will bring prosperity to all. Repurposing a vast military industrial complex to peaceful output will create hundreds of millions of jobs. There will be employment for anyone who wants it.
Those who would be representatives for the people would not be permitted to raise funds to run a campaign as they do today. Each candidate will have equal and unbiased access funded through taxes to present to the people their credentials. Cost will be kept to the minimum needed for the people to choose the best candidate that represents their desires. The electoral process should be run more like a job interview with every citizen being a hiring manager and getting one vote. No candidate should be permitted an unfair advantage over another. This is the only way the people can make an objective decision for a person who will honestly represent THEIR interest, not the hidden agenda of some corporate sponsor.
There should be one global currency. Only the global government should have the power to create currency and set interest rates to control economic growth and inflation. As we will discuss in a moment, this will drastically alter the role banks play in global finance.
Trade should be free between all regions of the world. However, during a period of transition there may be great turmoil while people crawl out from the ashes to begin rebuilding. During this transitional period, the government may facilitate the flow of some goods, namely food and healthcare, to prevent further suffering and starvation. Once this transition period is over, the government should maintain a minimum of involvement in commerce, except to ensure the safety and health of the people of Earth, as well as the health of the Earth itself.
Ideally, most regions should strive to become self-sufficient in order to minimize the need to import goods from other regions. There may still be regions that lack natural resources or the environmental conditions to become self-sufficient. In addition, other regions may produce an abundance that they cannot consume. If a region is permitted to maintain a negative trade imbalance for an extended period, the drain of capital out of that region will eventually lead to its people becoming impoverished. In such extreme cases, the world government may consider altering the borders of a region or even the merging of two regions so that the result is a self-sufficient region. Such a move may seem extreme, but is preferable to the alternative that would be an artificial wealth transfer akin to welfare to support the deficient region.
Reform Financial Institutions
The world’s financial institutions put profits before people, and that is going to be the catalyst for the financial disaster the world will soon go through. We must remove the temptation to do harm in the name of profits if we are to have a healthy financial system that supports a robust capitalist economy. At the same time, we need to ensure that banks do what is in the best interest of the people they serve. That cannot be done if a bank is located half way round the world from customers that they will never see in person. The best solution is that each regional government owns the bank in their region. Banks will have a reserve limit of 100%, meaning that they can only loan money that they have in deposit. They cannot create currency out of thin air as banks are permitted to do today. All interest earned from bank loans and fees collected go to the regional government replacing or at least minimizing the need for a regional tax. Loans can only be made to people and businesses in the banks region. Regions money stays in that region except for inter-regional trade. multiregional corporations should be discouraged or prohibited to prevent them from becoming too large and gaming the system.
By having the Region own the bank, the need for growing profits to satisfy shareholders is eliminated. The need for the region to collect taxes will be minimal if not eliminated altogether. Most money stays local, so it will be difficult for one organization to drain money from the local economy by simply transferring it elsewhere. Regions will have their own banks to fund capital projects, which removes the need to raise taxes to pay off bonds. Some of you may be thinking that this sounds ripe for wasteful or corrupt government spending. That is unlikely to happen because there will be an incentive to minimize waste and cost. If a region wants to be competitive and attract people and business to relocate in their region, they will need to balance the cost of providing a top-notch infrastructure while minimizing interest rates and fees for service, which create a burden on commerce. If infrastructure or services deteriorate or costs get too high it will detract from people and businesses moving there. We have therefore eliminated the need for greed that drives bad decisions, yet maintained the need to be responsible and competitive so as not to be wasteful, while keeping wealth local and decisions that impact a community local.
The global government may at their discretion issue new currency by depositing it in a regional bank. Doing so increases the money available for loans. The issuance on new currency should only be done to accommodate economic growth while keeping inflation at a minimum. The system cannot fail because there will always be enough currency in the bank to cover all loans.
A healthy Capitalist system relies on the hard work and innovation of citizens to improve their lot in life. A problem that keeps appearing in Capitalist economies from the very beginning is that if too much power accumulates in one or even a few hands, the system starts to break down and it becomes dysfunctional. If new business cannot compete and people cannot get ahead, a feeling of hopelessness and despair sinks in to the population, which carries with it a whole host of bad side effects, not the least of which is crime. The system should not impede growth unless that growth starts to impact competitiveness.
The United States saw this as a problem in the 19th and early 20th century and passed ant-trust laws to prevent companies from taking over an industry with a monopoly. Those laws have all been destroyed in the last 30 years with the result that ‘too big to fail’ as become a common phrase in American culture. No company should ever be too big to fail. Citizens should never have to bear the burden of bailing out a dysfunctional company. A fair and competitive market should always decide the winners. To accomplish this, some restriction may need to be devised to prevent a company or a person’s interest in multiple companies from exceeding some threshold whereby that person or company can manipulate an entire industry making it uncompetitive.
Reform Healthcare Institutions
As you can see from the chart above, healthcare as a percentage of GDP has grown by 700% in 50 years. That fact is the single biggest contributor to our nations deficit problem today, not social security or even defense spending. America spends three times as much as the next highest spender on healthcare. However, the quality of our healthcare is the worst among industrialized countries. We are in that race next to some East European and African countries.
Health care providers should all be converted back to non-profit organizations as they were in the 1940’s and 50’s. Universal health insurance should be provided by each region as a single payer system available to all citizens. Every region will be required to recognize anyone from outside that region for health care. Regions can then forward the cost for that healthcare to the region of origin. That way, regions whose industries rely on tourism will not be unfairly burdened by out of region people getting sick while visiting.
Regions acting without a profit goal, will nonetheless want to keep costs low while maintaining good health services in order to remain competitive. They can accomplish this by emphasizing wellness care and healthy living programs so that people stay healthy and avoid becoming a medical burden unnecessarily.
By providing free education to all citizens to any level they desire, the exorbitant costs doctors and even nurses incur before they even begin their career will drastically reduce the need to pay them as much just so they can repay student loans. Many doctors face financial hardship in their early years just for choosing that profession, and it just is not right.
A free higher education will also help ensure that we have people with the other skills required to compete in the modern world.
Another issue that will drastically reduce medical costs is tort reform. A doctor who is competent should not live under the fear that the slightest mistake will result in an expensive lawsuit and possibly a loss of their medical license. They need to be accountable, sure, but our current system goes excessively far. Doctors should feel free to document when an honest mistake is made so that other doctors can learn from that mistake. How else are they to improve? Tort reform will reduce the cost of malpractice insurance that is major contributor to rising healthcare costs.
The Second Reformation: Looking Forward
So, did you get out of you comfort zone, just a little bit? Did fears of the illuminati, or the New World Order conspiracy creep into your thoughts as you read my recommendation for a global government. Trust me when I say, that if the conspiracy theory is true, they would never in a million years adopt this plan. The reason is that I deconstruct their power base. The corrupt politicians and mega wealthy bankers will have no pulpit from which they can bully citizens. We will have a true democracy, something even the United States does not have today. Both banking and healthcare should be the twin backbones of every society. However, they are actually doing great harm instead, all in the name of profits. Those industries should be reformed into instruments for good and promoters of a healthy Capitalist global society. Finally, we would have an end to all wars and needless killing. Vast regions of the world that are suffering today under the harshest of conditions could be lifted up and made healthy again. The relief of so much suffering in the world alone makes this a noble cause.
If you agree with the ideas put forth here, then please help by passing the word. The more people who read this, the better our chances will be when it comes time for the reformation and the world is searching for answers. If you find flaw with these ideas please let me know. Perhaps things would have turned out different for the world if only Carl Marx had asked for a little critical feedback before publishing his Communist Manifesto.
In part I we beat up on banks because they failed the very people who put their trust in them. As it turns out, there is another industry able to do even greater harm than the banks; and it is equally difficult to understand why. I am speaking of course about the health care industry, both health providers and health insurance companies.
The Health of a Society
The health care system in the United State is a competitive one, made up mostly of for profit health care providers and insurance companies. On the surface competition may sound like a good thing. Competition means that doctors should compete for patients by providing the best care at the lowest market price. However, this is far from what happens in the American system. A number of factors over the decades have led to a system out of control and headed for a cliff just as the financial markets have been for decades. Only when the medical establishment crashes, the result could be much direr; our very lives could be stake.
A full examination of the health care industry would take several thick books, so a summary will have to suffice here. Throughout the 1900’s and the first decade of the new millennium the health industry has meandered down a winding path in ill-conceived attempts to improve itself. There was a time in our history when health care was non-profit and non-corporate, and cost so little that except in the worst cases, the need for insurance was negligible.
When you become ill, you go see a doctor. Almost all Doctors now are forced to work for a large health care corporation. As we have seen earlier in the financial industry, corporations care only about making their stockholders happy with increased profit. This fact sets the stage for our first conflict of interest, but it gets worse, much worse.
Most medical care is now provided through insurance. Insurance companies are also for profit corporations. An insurance company maximizes its profit by paying out less in health care costs than they collect in premiums. On the surface, it would seem logical that insurance companies would force the health provider establishment to keep costs down. However, the reality of the dynamic that arises from the interaction between these two related industries has taken some weird twists that have crippled the system.
The merging of health providers into large corporations has turned medical care into a commodity. There are plenty of sick people to go around, such that doctors rarely have to ‘build’ a medical practice any more. They go to work for a corporation with patients already lined up at the door. In the 60’s, 70’s and 80’s health care costs rose as new technologies made ever more elaborate, and expensive, options available. Hospital corporations figured they could make more of money by performing elaborate and expensive tests. No one complained if excessive tests and procedures were done as long as in the end, the patient survived and insurance paid the bill. Insurance companies were determined to put a halt to this abuse. In another move that on the surface made sense at the time, insurance companies started limiting how much they would pay for a specific ailment, not the treatment. A form of payment known as Capitation. Therefore, a diagnosis would yield a fixed payment to the health provider, regardless of a cost of actual treatment. Some insurance companies are no health providers also as they have merged, and they actually pay the doctor per patient like a salary, then deduct from that the cost of whatever treatment the doctor recommends. This of course puts the doctor in an untenable position.
This move by the health insurance companies had two major effects. The actual cost of treatment was now detached from the cost of providing health care and more easily hidden. There was a drive by corporate health providers to maximize profits by getting as many patients through the door as possible, diagnose early to get the fee they want, then rush the patient out the door with a minimum of actual expense. The fee for diagnoses would have to be averaged over many patients with different levels of care. Doctors who tried to work outside this system, stay independent and charge just for actual services rendered might only receive a partial payment from the insurance company. The result being, that even though they have insurance, the patient had to pick up the difference. Doctors simply could not compete with the corporate machine, and any doctors that were holding out on ethical grounds were forced to join the corporate medical system. The entire medical system is full of quick fixes that had unintended consequences because it is designed from the bottom up not to provide medical care in the best interest of a patient, it is designed to run like any other corporation and make a profit for their shareholders.
When there is a flaw in the design…redesign
When there is a fundamental flaw in the design of something, the last thing you want to do is create a short-term work around to mask the flaw. Eventually a case will appear when the work around fails and the original flaw is able to exacerbate that failure and make things even worse. If you design an aircraft that is too heavy to get off the ground, the best fix is not to simply get bigger engines. The best fix is usually to go back to the drawing board and design a lighter aircraft. You cannot fix a bad design with more bad design.
Our banking and health systems are poorly designed and rapidly failing because of the same fundamental flaw. They both are designed to serve their shareholders instead of the public good. The continued bad practices in the financial markets were not sustainable and eventually resulted in a sort of population crash of the system. That fundamental flaw still exists and so the next failure may be more devastating.
The same is true in health care. They are on an unsustainable trajectory of higher cost and poorer care. You would think with health care tripling in cost compared national GDP that we would have the best system money can buy. The reality however, that we spend three times as much money and we actually have the worst health care quality among the industrial nations.
Additionally, the growth of health care cost is not sustainable. Eventually the system will suffer a form of population crash like the one we saw in the financial sector. All it takes is some event like a mass illness; Avian flu perhaps could push the system to the breaking point where in all comes tumbling down. In addition, this time it might be accompanied with a real population crash.
Good Old Engineering
In part I of this series we looked at how one aspect of the system, banking, is broken. In this second part of the series we examined another industry; healthcare. One can point out a number of areas where banking and healthcare have failed the system, but if all you do is look at the direct cause of the failure, you never really understand how to prevent it from happening again. You end up applying Band-Aid’s to a chronic problem at best, or you get unintended consequences that are worse than the original problem.
Looking only at the points of failure is like examining a crashed jetliner, discovering the failure was a crack in the frame somewhere and then saying simply a crack caused it to crash, so we will give everyone a parachute. If you do not look at what led to a crack appearing in the first place, you never revise the design, and perform the engineering required to prevent the crack from appearing again.
One of the cracks that appeared in the banking system was the fact that banks and investment firms were now in bed together and colluded to create ultra-risky investments while hiding the true risk of the underlying mortgages inside. A huge crack in the health system comes from the fact that two sectors, providers and insurers, compete increase their own profits and against each other with patients stuck in the middle taking most of the fire.
Regulation by the government can place a Band-Aid over the crack, but the underlying cause of the crack is still there. More regulation will likely just result in more unintended consequences, more inefficiency, and higher cost.
What this means is, that while one crack is patched others may start to appear. What is needed to fix this problem is not a patch over the crack, but a change in the design.
The Profit Motive
Why would the banks do what they did that led to the crisis in housing? Why would hospitals, staffed with caring and empathic doctors and nurses, work a system that is so ineffectual and unfair? Why would health insurance companies not just permit but also actually create so much pain and suffering in the world?
The answer is simple. They are corporations, and as such, they have shareholders who have invested in them. The humanity and compassion that is felt by the individual is nonexistent in corporations. Shareholders invest for one reason, to make money. The more money you make, the more investors will push your stock price up, and everyone gets rich. Banks, as the holders and creators of money, have a fiduciary responsibility to the people and society, to cause no harm. Health providers have a moral duty and take an oath to do no harm. However, they answer to their shareholders who demand more and more profit that has the potential to cause a great deal of harm. There is a conflict of interest between doing no harm to the people who put their trust in these institutions, and the investors whose demand for more profit drives all decisions. We live in a world where our financial health and physical health are in the hands of a board of directors who we will never meet, and who will never know the names of their victims.
In summary, we have seen how a basic flaw in the design of our banking and health industry leads to conflicts of interest with the good of society. We have discussed and probably witnessed firsthand the pain and suffering these kinds of conflicts of interest cause. However, no examination of bad design can be complete without offering some suggestions for design changes. That will be the topic of part III in this series.
The first Reformation began in the 16th century when Martin Luther started a movement to break away from the Catholic Church, which had shaped society in Europe for 1,000 years. When people feel disenfranchised from the system, once empowered by something, in this case Martin Luther, they will form a new system. That is what the early Lutherans did; they formed their own church that met the needs of their people. Thus began the Protestant branch of Christianity.
It may be about to happen again; however, this time it is not a greedy and repressive Catholic church causing the problem, nor is the effect going to be limited in scope to Europe. The next reformation will affect the world’s new God, ‘money’, and involve the reshaping of our new-world church, the world’s financial institutions, on a global scale.
Which form is the best economic system: Capitalism or Socialism
The measure of what is best will vary depending on whom you ask, and what kind of mood they are in. For many people it all boils down to the selfish notion of whatever is best for them as an individual. When that is resolved then it becomes what is best for the family, children and other heirs. Once that is secure, what is best for society in general may or may not be considered. Not everyone fits this pattern however. Some people have a more highly evolved sense about their place within a society, realizing that when society is made better as a whole, that their lot in life can be improved also. Instead of the proposition being ‘I Win – You Lose’, it becomes ‘If you win, I win too’.
Socialism is an economic system in which the means of production are publicly or commonly owned and controlled cooperatively; or a political philosophy advocating such a system. As a form of social organization, socialism is based on co-operative social relations and self-management; relatively equal power-relations and the reduction or elimination of hierarchy in the management of economic and political affairs. (Wikipedia)
Few people in today’s world will argue about the problems inherent in a pure Socialist/Communist society as we saw in the former USSR. In a pure Socialist society, the drive to grow and improve is removed. All incentives to excel in life are diminished or obliterated. Because of the abuses suffered under Capitalism, where very powerful people could completely dominate a whole class of people, it became a desired feature of a new system to eliminate the possibility that one person could come to dominate over another. That was the intent; in practice though it had problems.
The flaws with the Socialist system are many, but most notably, it is easily gamed by people who would manipulate it for their own personal gain. People who would normally excel and seek power still do so, any way they can find it; usually with under the table with illegal activities or corruption. In addition, people who lack power become increasingly dependent on the state to provide all their needs with the result being lower productivity and a population that lacks fulfillment. The happiness that can come as the result of a rewarding lifestyle is just not possible.
Capitalism is an economic system in which the means of production are privately owned and operated for profit, usually in competitive markets. Income in a capitalist system takes at least two forms, profit on the one hand and wages on the other. In any case, profit is what is received, by virtue of control of the tools of production, by those who provide the capital. (Wikipedia)
Carl Marx came up with the theory of Socialism as an answer to the corruption and abuse that he witnessed in early 19th century England with child labor and sweat shops being the norm. Marx was not an evil wana-be dictator hell bent on the murder of millions of people in Russia. He was a humanist that simply saw a flawed system, and wished to improve humankind’s lot on this Earth. Others would take those ideals and twist them into what became Soviet Communism.
The flaws in human nature that led to the horrible working conditions in 19th century England are still with us. Humankind still has the capacity to act selfishly and with a greedy heart by treating other people like livestock; there to do their bidding, and nothing more. Capitalism was at risk of abject failure during and shortly after the 19th century because of these abuses.
Therefore, while Capitalism has been more successful in terms of the growth and prosperity of our society than its antithesis, Socialism, they both contain similar flaws; flaws in our human nature.
In dealing with human flaws, where Capitalism primarily differed with Socialism, is that the real power remained distributed in the hands of the people. Democracy won the day. Those people through their elected representatives learned how to place a yolk around the neck of Capitalism to keep its greed and corruption in check, and from gaining too much control, thereby realizing a balanced system. In a balanced system, Capitalism could provide growth and improve ones lot in life without the fear of repression or enslavement.
The Capitalist system though is self-serving, not self-correcting as some would profess. Those who sit at the top of the food chain, pine for a return to a pure unfettered Capitalism where their power can grow unchecked, claiming that only when set completely free can the system reach its real potential. They will go to any length, and spend any amount of money on propaganda to sell their position to the gullible voting public. All that is needed is time and money. Enough time for people to forget what they are capable of, and enough money to buy their votes.
What does all this mean to Mr. and Mrs. Main Street USA.
In the early part of the 20th Century America was at a crossroads. Capitalism was failing horribly with wild economic boom/bust cycles, and a new kid on the block Communism was starting to look attractive to the people living under Capitalist repression. Leaders knew they needed to do something drastic to preserve their Capitalist system or risk losing it to a communist takeover as Russia did just a few years earlier. What they did would turn out to be revolutionary, and save Capitalism. They introduced social reforms into the system, attempting to realize a few of the benefits of Socialism without adopting the entire system. This was not even meeting Socialism half way; it was more like a gentle nudge in the general direction. However, it was enough at the time to make a dramatic difference. Society blossomed like a flower.
The result was twofold: First, the people were lifted up out of poverty, creating for the first time on planet earth a society dominated by a middle class. The second thing to happen was that this new middle class had an insatiable hunger for ‘things’; the trappings of the wealthy that they had been denied. That desire to buy the things that they needed and wanted made them into a whole new entity; they became consumers. The more people consumed, the more producers could grow and produce the things they wanted. The American consumer economy created unprecedented growth, leading them to dominate the entire world as far as Income per capita and standard of living.
America has a debt problem; however, it is not the one you have been hearing about
A little problem happened on the way to the bank however. Economic output requires resources, many resources; especially energy. When domestic resources could not meet demand, those resources had to start coming from elsewhere. When that happened, the growth dynamic changed. Wealth started being syphoned off the economy to other nations. With those dollars disappearing, it became harder and harder for the typical American family to continue the growth they had all become accustomed too. However, being a resilient and industrious people, we found ways to continue to grow the economy, even while more and more of the nation’s wealth was being drained off. We discovered a new source of untapped labor by putting women to work. That bought us another decade, or so. However, the hunger to consume and grow the economy was great, and the producers of goods found ever more ingenious ways to tease that hunger.
They soon discovered that extending credit was an easy way of creating wealth where it did not exist before. The banks became the creators of the money supply by lending out more money than they had in deposits; they were permitted to actually create money out of thin air. Up to 10 dollars for every dollar they have in deposits can be created by a bank and loaned out.
It was soon realized that creating money out of thin air was very profitable. In fact, it did not even matter if the people borrowing the money had the ability to pay it back. More profit is made on a risky loan, than on a secure one; a lot more profit. There soon began a new gold rush, a credit gold rush, for the remaining gold left in the pockets of the middle class. The fact that this huge influx of money to the system maintained a healthy economic growth meant that the powers that be, the government, who should have been watching out for us, and crying foul, were turning a blind eye.
While Americans were going farther and farther into debt in a crazy attempt to maintain what had long ago become an unsustainable growth in the economy, the drainage of wealth from the American middle class became even more acute. In search for ever better profits, and a global market place with access to education, suddenly an inexpensive workforce became available. Manufacturing moved overseas in the proverbial blink of an eye. All those wages paid to American workers and being plowed back into the economy where gone. More wealth than ever before was now being syphoned out of the American economy. More and more debt would be needed to keep the economy fueled and growing. The only way to effectively do that was by easing credit so that anyone with even a slight desire could take a big swing at the American dream, go deeply into debt and buy a house. In addition, very efficient sales and marketing firms made sure everyone who was still breathing and capable of forming a signature got their piece of debt to fuel the economy. It was a feeding frenzy at the mortgage brokers to see who could sell the most debt, risk be damned.
The normal checks and balances that would prevent abuse of the system were tore down, one by one until the feeding frenzy reached a point commonly referred to as a population crash. A population crash occurs when a species of animal is given unrestrained access to food, and so they over breed creating more and more of their own kind until suddenly the last of the food is eaten, and there is no more to be found. The population then crashes with a massive die off because of starvation, sometimes even leading to the end of that species. It is a real phenomenon that happens in nature. We are now going through a financial population crash as the supply of new credit, like an animal’s food supply has dried up. When there was no one left to loan money to, all the people who could take on debt had already done so, the system lost its food supply, and the whole system started crashing.
In a panic, the government made a bone headed move with TARP. They gave billions of dollars to the banks in an attempt to create liquidity so people could start getting access more debt and keep the economy fueled. The banks in one of the only intelligent thing they would do throughout this fiasco withheld the funds and tightened up credit. They knew that the people could not perpetuate the debt game any longer. There was no one left to borrow the money they were given. In fact most banks didn’t even want or need the money, but were forced to go along. After all they could creat as much money as they need any time they wished.
The economy continued to suffer for another year with anemic growth. However, before you rush out and give your banker a big hug and a thank you for the tough love, know that they did put that TARP money to good use. They had to spend it once it was on their books, so they lined their own pockets with record payouts and bonuses to all executives. The rich get richer, while the rest of us stew in our own juices.
This will be continued in part two where solutions to some of our most pressing problems will be laid on the table.
In 2000 I was telling everyone that would listen, that global oil production would not be able to keep up with demand within the next 15 years. Does anyone doubt this now?
In 2005 I was telling anyone who would listen that within 5 to 10 years cars will be driving themselves like an airplane does on auto pilot. Most manufactures either have driver assist or partial auto pilot coming out by next year. Fully autonomous cars are only a few years away now. (update GM says they will provide sophisticated driver assist mostly for collision avoidance by 2015 and fully autonomous cars by 2020.)
So, what’s my latest prediction for the next decade?
Manufacturing will undergo a transformation so radical that the industrial revolution will be trivial when held up for comparison. Actually a number of new technologies stand at the cusp to revolutionize everything from the ground up.
1. New materials are coming out of Nanotechnology; glass that is stronger than steel, batteries that hold 10 times the charge and can be recharged in seconds, and a DVD disk that can hold 600 hours of video. New delivery for cancer drugs are being developed that will allow them to be carried by robots that are smaller than a blood cell, and can deliver their drug at a specific target site, killing only the tumor. Look for all of these to either be on the market or in trials within 3 to 5 years.
2. Computers will continue to double in power for the foreseable future every 12 to 18 months. A super computer will excede the processing power of the human brain before 2020. The software to create human level intellegence will take another 10 years.
There are two specific areas that will benefit from all other advances to revolutionize manufacturing, reshaping our world in ways we can’t even imagine; robotics and 3-D printing. We have had both technologies for some time now, however both seeing rapid advances due to other technologies that are enabling them.
3. Within 10 years most homes will start installing 3-D printers (a replicator not unlike those we saw on TV shows like Star Trek). Like the Microwave oven, it will be expensive and bulky at first, but eventually no household will be able to imagine life without one. Imagine the ability to manufacture 90% of anything you could ever want in your kitchen or garage. A new pare of shoes, a sweater, works of art, spare parts to fix your vacuum cleaner, or heck a whole new vacuum cleaner. Need a special tool to replace a roofing tile, print one, and then print the roofing tile. There are even plans to build a printer large enough to manufacture whole houses on-site. NASA is very interested in the house printer for off world home construction, and a general 3-D printer to make spare parts in space.
Even printing food is on the table:
4. The field of robotics is currently constrained mostly to special industrial situations like the automotive industry. Until now they were not well suited to work in close proximity with humans because they lacked the required attributes to operate safely around people. A new generation of robots is beginning to show up. Soon, robots will have skin that responds to touch, and have soft bodies so that they can avoid hurting people. Robot vision and artificial intelligence will be able to operate in our disorganized and cluttered world. They will communicate verbally as well as any natural person. Within 10 years robots will be commonplace in such environments as hospitals and nursing homes, helping with patient care. They will also start showing up to replace administrative and secretarial functions; though these latter units may not look like a traditional robot because they may simply exist in a person’s desktop computer. They may in fact show up in your home as a very fancy, and smart answering machine; one that not only answers the phone and interacts like a real person, but also wakes you up in the morning, reminds you of your doctors appointment and not only balance your checkbook but act as a finicial advisor and travel agent. Soon thereafter, as the price point comes down another order of magnitude, robots will start to replace domestic labor and become common household appliances, running around doing the laundry at 3 am when electricity is cheaper, and trimming the bushes in the yard. And yes, even putting the cat out at night.
In summary the outsourcing of manufacturing jobs overseas will be a short lived phenomenon. Manufacturing will become localized to where it is consumed. Robots will fill most other needs for manufacturing where items are either too large or too complex to be made with a 3-D printer/replicator. Demand for raw materials and delivery of raw materials to the site of manufacture will be in high demand, but there again, that industry easily lends itself to automation with the robots coming on line in the next decade. We will once again have to transform our economy to adapt to the new normal.
People need not fear the robot revolution in the next twenty years. After that, if were dumb enough to design them without safe guards then perhaps we need to loose.